Facebook's Success Hinges On How Much More It Can Learn About Us

Investors will be betting that Facebook won't make its users so uncomfortable over privacy that they quit.

Photo Illustration: Joel Saget
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Originally published on May 14, 2012 7:49 pm

This week, All Things Considered is hitting refresh on its All Tech Considered segment — taking you into the changing landscape of technology and how it intersects with everyday life. From Silicon Valley to China, we'll feature stories from around the world, stay on top of innovations that matter — and get you the news you need to know. Every Monday, we'll preview the week's big tech stories.

Today, Facebook CEO Mark Zuckerberg turns 28 and gets the ultimate birthday gift: His popular social networking site is expected to go public later this week. The IPO could be valued at nearly $100 billion. Meanwhile, Yahoo, another company that also once had a bright future, continues to undergo upheaval as it struggles to define its mission.

Facebook is expected to start selling stock to the public and begin trading on the Nasdaq Stock Market on Friday. One of the things that are remarkable is how quickly Facebook became so valuable. Can a company started less than a decade ago in a college dorm really be worth that much?

To put this in perspective, when Facebook goes public it will probably be valued at more than Boeing and Ford combined. But Facebook's profits are relatively minuscule.

So to justify its sky-high stock price, Facebook will need to grow like a weed for the next few years. The amount of money it brings in will have to double and then double again for this deal to make sense for long-term investors.

Right now, more than 80 percent of the money Facebook makes comes from advertising. So that piece of its business needs to expand really quickly. But Facebook doesn't want to clutter up its site with too many ads and annoy its users.

Late last week Facebook gave us one hint about where it might be headed. The company has huge amounts of data about each of its users. It knows your likes, your friends — and where you went to school. Right now it uses those data to sell ads aimed at you, but those ads only appear on its own website.

Friday Facebook tweaked its privacy policy, allowing it to use that information to place ads aimed at its users anywhere on the Web.

The company has a long history of pushing people to share more than they might otherwise be comfortable sharing. And there is no indication that trend will change. But there is always the risk that at some point millions of people will simply say they've had enough and quit the service. So far, that hasn't happened.

But there's also another risk — that regulators either in the United States or in Europe get tough and really start putting strict limits on what Facebook can do.

So Facebook has to walk this line, while at the same time adding members, selling ads and figuring out how to collect even more information about us.

If Facebook doesn't figure all of this out, it will be very bad news for investors.

Investors who buy Facebook this week and plan to own this stock for the long haul are betting on a kind of crazy, almost unprecedented growth. Because without that, Facebook begins to look a lot like another Silicon Valley company — Yahoo.

Right now, Yahoo and Facebook sell just about the same number of ads. They both have audience measure in the hundreds of millions. But Yahoo stock is worth one-fifth of Facebook's projected value.

Yahoo just pushed out its new CEO, Scott Thompson, who was hired less than six months ago.

Thompson got caught lying about his background. In documents filed with the Securities and Exchange Commission and on his bio, he claimed a degree in computer science when in fact his college degree was in accounting.

When the news first broke, Thompson claimed it was a misunderstanding — he had never lied. But the more folks dug into it, the less credible it looked. Then over the weekend, Thompson reportedly told Yahoo's board of directors he had thyroid cancer and stepped down.

Yahoo has had five or six CEOs in the past five years, depending on how you count it. And actually this is bigger than losing another chief executive. A group of activist investors used the controversy to land three seats on Yahoo's board of directors. And in the past this group, Third Point, has pushed to break Yahoo up or sell it.

So this week as Facebook goes public, it's worth remembering that Yahoo was once valued by Wall Street at more than $100 billion too.

Copyright 2012 National Public Radio. To see more, visit http://www.npr.org/.

Transcript

ROBERT SIEGEL, HOST:

From NPR News, this is ALL THINGS CONSIDERED. I'm Robert Siegel.

MELISSA BLOCK, HOST:

I'm Melissa Block. And it's time now for a new version of All Tech Considered.

(SOUNDBITE OF MUSIC)

BLOCK: We're hitting refresh on the segment, taking you into the changing landscape of technology and how it intersects with everyday life.

SIEGEL: From Silicon Valley to China, we'll feature stories from around the world, and we're also looking for more feedback and ideas from you. Every Monday, we'll preview the week's big tech stories.

BLOCK: Today, Facebook CEO Mark Zuckerberg turns 28, and he'll be getting the ultimate birthday gift. His popular social networking site is expected to go public later this week. The IPO could be valued at nearly $100 billion. Also, over the weekend, Yahoo's newly appointed CEO, Scott Thompson, stepped down.

For more on both stories, we're joined by NPR's Silicon Valley correspondent, Steve Henn, who's in Menlo Park today. That's the small city where Facebook is based.

And, Steve, for non-techies, one of the things that's so remarkable about Facebook is how quickly it became so valuable. But it does raise the question: Can a company that started less than a decade ago in a college dorm really be worth $100 billion?

STEVE HENN, BYLINE: Well, that's a great question. And to put that in perspective, when Facebook goes public, it will probably be valued at more than Boeing and Ford combined. But Facebook's earnings, it's actual profits, when you compare them to the profits of companies like Boeing and Ford, they're tiny. They're miniscule. So to justify its sky-high stock price, Facebook will need to grow like a weed for the next few years.

The amount of money it brings in will have to double, and then double again, and then maybe double again for this deal to make sense for long-term investors.

BLOCK: And how is Facebook going to achieve that level of growth, and what would that mean for the hundreds of millions of people who use it?

HENN: Well, right now, Facebook makes most of its money comes from advertising. More than 80 percent comes from that source. So that piece of its business is going to need to expand pretty quickly. But Facebook doesn't want to clutter up its site with too many ads and annoy its users. And so late last week, Facebook gave us one hint about where it might be headed.

The company has a huge amount of data about each of its users. It knows what you like. It knows who your friends are, maybe where you went to college. And right now, it uses that data to sell ads aimed at you, but those ads only appear on its own website. Friday, it tweaked its privacy policy. So going forward, it'll be able to use that information to place ads aimed at users anywhere on the Web.

BLOCK: And that sounds, Steve, like the kind of thing that will really annoy Facebook fans more than they already have been.

HENN: Well, that's true. You know, managing privacy expectations of its users has been a big problem for Facebook, and I think it probably will remain one going forward. The company has a long history of pushing people to share more and more information about themselves, more information than they might be comfortable sharing. And there is no indication that trend's going to change. So there's always the chance that Facebook could go too far, and millions of people could start quitting in droves.

You know, so far, that hasn't happened. But there are other risks as well. Regulators, either here or in Europe, could get tough. Facebook's already landed in hot water in both places. So Facebook has to walk this line. While at the same time trying to convince people to share more information, attract new users, do that without running afoul with the law or really freaking us all out.

BLOCK: And if they can't figure that out, what happens then?

HENN: Well, that could be really bad news for investors. You know, investors who buy Facebook this week and plan to own this stock for the long haul are betting on a kind of crazy, almost unprecedented type of growth. And because of that, without that kind of growth, Facebook begins to look a lot like another Silicon Valley company, Yahoo.

Yahoo sells more ads than Facebook does right now. Both companies measure their audience in the hundreds of millions. But Yahoo stock is worth just one-fifth of what Facebook's is.

BLOCK: And, Steve, let's talk about the recent news with Yahoo. Its new CEO, Scott Thompson, was just pushed out. He was hired less than six months ago. What happened to him?

HENN: Well, the short answer is that Scott Thompson got caught fibbing about his background. In SEC documents and on his bio, he claimed that he had a degree in computer science when, in fact, his college degree was in accounting. When the news first broke, Thompson claimed it was all a misunderstanding, that he had never actually lied.

But the more folks dug into that, the less credible it looked. Then over the weekend, Thompson reportedly told the board he had recently been diagnosed with thyroid cancer, and he stepped down.

BLOCK: It's a company, Yahoo, that's gone through a lot of CEOs in just the last five years, right?

HENN: That's right. Depending on your count, it's four to six. And actually, Thompson being pushed out is a bigger story than Yahoo losing just another CEO. A group of hostile investors had dug up the information about Thompson that may have led to his resignation. And they used this controversy to land three seats on Yahoo's board of directors. In the past, this group has pushed to break Yahoo up or try to force the board to sell it.

So, really, this is a company whose future is now in doubt. And this week, as Facebook goes public, it's worth remembering that, at one point, Wall Street valued Yahoo at more than $100 billion too.

BLOCK: And to find out more about what's going on in the tech world, you can visit the All Tech Considered blog, that's at npr.org, and share your comments. We do want to hear from you. Or you can use your mobile device's voice recording feature to send us a short message, 30 seconds or less, and email it to alltech@npr.org. Transcript provided by NPR, Copyright National Public Radio.